Dairy Supply Chain

Margins 2010/11

Dairy Supply
Chain Margins 2010/11
Contents
Executive summary

Dairy farm income

Liquid milk margins

Cheddar markets

10

Mild Cheddar margins

11

Mature Cheddar margins

13

What happened in 2010/11

15

Conclusion

18

Appendix 1

19

AHDB [operating through its DairyCo division] seeks to ensure that the information contained within this document is
accurate at the time of printing. No warranty is given in respect thereof and, to the maximum extent permitted by law
the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused
(including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained
in or omitted from this document.
All figures within this document are as accurate as possible; however the nature of the information means that all
reported figures are averages and approximations. This means that there is a small margin of error from precise figures
for individual companies, retailers, contracts etc. However, all changes should be representative of what has happened
over the past decade.

Executive summary
The Dairy Supply Chain Margins report presents evidence on the gross margins made by farmers, processors and retailers
on the sale of liquid milk and mild and mature Cheddar. This years report provides evidence on the average margins made
across the whole 2010/11 milk year, which ran from April 2010 to March 2011, as well as some half year comparisons.
A key feature of the dairy market in the year was the sustained high level of commodity prices and the apparent
disconnection with GB farmgate prices.
At the retail level, the liquid milk market experienced a year of two halves, with prices and margins remaining essentially
unchanged from the previous year in the first half, followed by a significant drop in prices in the second half. However,
the competitive pressures faced by liquid milk processors to secure retail supply contracts kept the wholesale price down,
allowing retailers to maintain their gross margin at around 34%.
With mild and mature Cheddar however, retailers saw a drop in margins as wholesale prices were rising on the back of
strong commodity markets and limited availability while retail prices remained stable. Retail gross margins fell from 51%
to 47% for mild Cheddar between 2009/10 and 2010/11, while mature Cheddar gross margins fell from 52% to 49%.
At the processor level, gross margins fell for liquid milk while increasing for both mild and mature Cheddar. In the liquid
market, the strength of commodity markets put upward pressure on farmgate prices, while wholesale selling prices fell,
squeezing gross margins from both sides. In the case of Cheddar, gross margins increased as a result of the combination
of strong wholesale markets, strong demand for Cheddar on domestic and export markets and, in the case of mature
Cheddar, the effect of branding to reduce retailer alternatives.
The price farmers receive for their milk, the farmgate price, increased for the 2010/11 milk year by 5% compared to the
previous year, to 25.1ppl. In comparison, the market indicator AMPE (Actual Milk Price Equivalent), which reflects returns
from butter and powder commodity markets, showed a 31% rise. It must be noted however that during the period of falling
prices in 2008/09 farmgate prices did not fall as fast as AMPE.
This reflects the situation that there are some factors within the UK dairy supply chain which affect the speed of transmission
of price changes to the farmgate. With expectations of continued upward pressure on input costs, further impacting margins
at all levels of the supply chain, an understanding of the process of price adjustment along the supply chain is important.
For a sustainable dairy farming industry to exist, conditions within the supply chain must ensure that farmers are not
disadvantaged over the long term. DairyCo has commissioned research to examine how prices along the supply chain
adjust to changes and how this may impact on farm revenues. Findings from this report are due to be published at the
end of July 2011.

Dairy farm income

Dairy farm incomes fell in the 2010/11 milk year for the second year in a row according to provisional figures published
by Defra. While UK farmgate prices increased through the year on the back of improved commodity markets and farm
production levels were up, the increases in input costs more than outweighed these gains.
For the 2010/11 milk year, the average farmgate milk price in the UK was 5.7% up on the previous year (Figure 1), driven
primarily by the 21.2% rise in average prices in Northern Ireland (NI), where milk prices are strongly influenced by commodity
price movements. While it can be seen that prices in NI were slightly higher than in GB for the majority of the past year, as
producers benefitted from strong international demand for dairy products, the gap between NI and GB prices during the
downturn of 2008/09 was much larger. Dairy farmers in GB are more insulated from the downward movements in the
market than NI farmers as a result of the presence of liquid milk supply contracts. The growing number of retailer aligned
contracts will also have contributed to more stable pricing within the GB market.

Figure 1: Average farmgate milk price

35

pence per litre

30
25
20
15
10

Ap

r0
Ju 5
l
O -05
ct
-0
Jan 5
-0
Ap 6
r0
Ju 6
l-0
O 6
ct
-0
Jan 6
-0
Ap 7
r0
Ju 7
l-0
O 7
ct
-0
Jan 7
-0
Ap 8
r0
Ju 8
l
O -08
ct
-0
Jan 8
-0
Ap 9
r0
Ju 9
lO 09
ct
-0
Jan 9
Ap 10
r1
Ju 0
l
O -10
ct
-1
Jan 0
Ap 11
r11

UK farmgate price

GB farmgate price

NI farmgate price

Source Defra1, DARDNI

1

UK milk production for the year was 13,332 million litres, an increase of 507 million litres, or 4%, from the previous year
volumes. The year-on-year increase in production within GB was slightly lower at 3%, while NI producers recorded a 9%
increase in production on the back of improved milk prices and favourable weather conditions. GB production growth was
probably less influenced by rising prices but did benefit from good grazing conditions through the year. The presence of
retailer aligned supply contracts will also have contributed to the increased production, as farmers on these contracts are
less affected by price volatility2.

1Average UK farmgate milk prices are calculated from monthly surveys of milk purchasers conducted in England and Wales by Defra, in Scotland by RERAD
and in Northern Ireland by DARD. The surveys together account for approximately 91% of UK milk bought by milk purchasers.
2 As highlighted in the 2010 DairyCo Farmer Intentions Survey.

The Defra measure of Farm Business Income for the average dairy farm shows a 24% decline in income between 2009/10
and 2010/11 for England, and a drop of 13% for Wales3. The Defra calculation of Farm Business Income includes income
from the Single Farm Payment4 as well as income from any diversified activities. It does not include the cost of family and
spouse labour, imputed rent for owner occupiers, or any reinvestment. In Northern Ireland, farm incomes are forecast to
more than double, a result driven by the combination of high prices and production growth, although it should be noted
that this is simply a recovery of ground lost in the previous year.
The provisional figures for England and Wales were based on the assumption of increased farm production and higher
average farmgate milk prices for the year ending February 2011. Any improvement in farm incomes however will have
been offset by an estimated increase of 7%5 in the main input costs for dairy farms. The increase in feed costs were forecast
to rise as a result of both higher prices and larger quantities of purchased feed, based on the assumption of lower yields
of forage caused by unfavourable growing conditions in 2010.

Table 1: Farm Business Income

per farm

England

Wales

N.Ireland

2006/07

31,000

30,500

27,300

2007/08

55,000

51,300

58,700

2008/09

69,500

62,200

37,500

2009/10

56,000

52,200*

19,300

2010/11

42,500*

45,600

39,800
*Provisional Estimate

Source: Defra Farm Business Survey

Figure 2: Farm Business Income

80,000
70,000

per dairy farm

60,000
50,000
40,000
30,000
20,000
10,000
0
2006/07

2007/08
England

2008/09

2009/10

Wales

2010/11
provisional
N. Ireland

Source Defra, Welsh Assembly Government, DARDNI

3Farm Business Incomes are published each year based on the Farm Business Survey and are provisional.
4As single farm payment is decoupled from agricultural production ie you do not have to produce an agricultural product to receive the payment, it can be
argued that it should not be included in the income calculation of a dairy enterprise.
5According to Defras provisional estimates of farm incomes for 2010, including the main input costs of energy, fertilisers, feed and vet fees.

Liquid milk margins

The average retail price for liquid milk in multiple retailers declined sharply over the past year to 58.9ppl compared to the
average of 65.0ppl in 2009/10, a drop of 9.4%. Retail prices for milk have been increasing steadily over the 10 year period
to 2010 as price competition was limited due to the shift in sales from doorstep to multiple retailers. When examining the
trends in retail prices since 1999, it can been seen that there was a substantial increase in the retail price in 2005/06
when retailers responded to pressure from producers and processors to increase returns in order to cover increased costs.
Two further significant increases in retail prices occurred in 2007/08 (14%) and 2008/09 (12%) which can be attributed
to increased processing costs in 2007/08 and to surges in prices for dairy commodity products on world markets in both
cases. Combined with this, retailers have been able to realise increases in gross margins even during times of increasing costs.

Figure 3: Prices and gross margins for liquid milk

70
60

pence per litre

50
40
30
20
10
0
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Farmgate milk price

Liquid milk processor margin*

Liquid milk retailer margin*

Source DairyCo
*The gross margin equals the difference between the selling price and buying price for milk

During the 2010/11 milk year, multiple retailers began to lose market share in the milk sector to the discounters and freezer
centres. The growth in volume sales in the discounted sector of the market can in part be attributed to consumers searching
for better deals, but may also have been due to the active strategy by these retailers to capture some of the margins
available on retail milk sales by selling at a lower price. The impact of this was to increase price competition in the retail
sector, and early in 2010 most retailers began to offer a discount line of milk to counter the impact of the low prices
available in discount and freezer outlets.
In the 2010/11 milk year, despite a situation of increasing dairy commodity prices and increasing production costs, there
was no increase in prices for milk at the retail level. In fact, prices were dropped as retailers aimed to regain some of the
market share lost to discounters. In August of 2010, Asda began a long-running price-war when it cut the price of its milk
from the standard 1.53 for a 4 pint polybottle to 1.00. The other major multiple retailers quickly followed, with various
price cuts and multi-buy promotional offers, which remained in place throughout the remainder of the 2010/11 milk year.
The impact of these price promotions was that the average price for milk over the year fell 9%, from 65.0ppl to 58.9ppl.

Table 2: Comparisons of liquid milk gross margins

2000/01
ppl
Farmgate milk price
(Defra average6)
Processor gross margin7
Processor selling price
Retail gross margin7
Retail price

2009/10

margin

17.3
14.0

40.5

margin

23.8
45%

18.9

23%

22.3

31.3
9.2

ppl

2010/11
margin

25.1
44%

13.6

34%

20.2

42.7
65.0

ppl

35%

38.7
34%

58.9

Source: DairyCo

Wholesale prices for liquid milk also fell in 2010/11 compared to the previous year despite the increasing prices for dairy
commodities. AMPE8, which provides an indication of movements on commodity markets, increased by 31% on average
over the year while in comparison, the average selling price for liquid milk at wholesale level declined 9% (4.0ppl) to 38.7ppl.
Selling prices for liquid milk were heavily impacted by events in the retail market, as retailers looked to regain margins lost
due to price competition through negotiating lower purchasing prices. The majority of the large multiples supply contracts
were re-tendered during the 2010/11 milk year, and competition among the liquid milk processors to secure these contracts
contributed to the erosion of selling prices.
On the back of the strong dairy commodity markets, the farmgate price increased during 2010/11, with average milk
prices increasing every month except for December 2010 and January 2011. On average, farmgate prices rose by 5%
during the year to 25.1ppl, compared to the average of 23.8ppl in 2009/10. Combined with the 4.0ppl year-on-year
decrease in the processor selling price, this resulted in a squeeze on processor gross margins, which fell by 5.3ppl (28%) in
2010/11 to 13.6ppl. In percentage terms, the gross margin dropped from 44% to 35% over the course of the full financial
year. Retailers meanwhile were able to retain a gross margin of 34% despite the 6.1ppl decrease in the average retail
selling price.

6Please note that farmgate price figures may differ from annual average figures published by Defra for the year in question. This is because Defras annual
average figures are weighted by monthly production whereas the figure used above is a straight average of the monthly average price paid in the year.
7Gross margin does not equal profit as it only takes into account the cost of purchasing the milk. Other operating costs and overhead costs are not included.
8AMPE is calculated from the returns available on wholesale markets from converting milk into butter and SMP, and as such provides an indicator of the bottom
of the milk market.

It is important to note that changes in gross margins do not necessarily imply a similar change in profitability. The impact
of changes in gross margins at the different levels of the supply chain will be dependent on how costs and other income
streams have changed. The 2010/11 period saw substantial cost increases at farm and processor levels, with the main
on-farm input costs of feed, fuel and fertiliser all recording considerable price increases over the period, while processors
saw increases in oil and resin related costs. At the same time, they will also have benefitted from the surge in cream prices,
which increased by around 30% over the year to just under 1,500/tonne from an average of 1,150 in the previous
year. The additional revenues available from cream will have helped to offset part, but not all, of the reduction in margins.
One of the key features of the 2010/11 milk year was the change in market conditions between the two halves of the year.
In reaction to the economic recession and to the erosion of market share, retail prices dropped sharply. At the same time,
processors were realising improved revenues from high cream prices, seeing input costs increase and competing for large
retail supply contracts. It is interesting, therefore, to examine the impact of these events on gross margins in the supply chain
between the first and second half of the year.
Six-monthly prices and gross margins were calculated and are presented in Table 3. In the first half of the 2010/11 year
(Apr-10 to Sep-10), the average retail price of milk was 61.7ppl, reflecting a 5% reduction in average prices compared to
the previous year as retailers attempted to offer a discount option to their customers. In the second half of the 2010/11
year, the average price dropped a further 5.7ppl (9%) to 56.0ppl following the initiation of the price war on milk.

Table 3: Six-monthly comparisons of liquid milk gross margins 2010/11

H1 2010/11
ppl

Farmgate milk price*

(Defra)

24.2

Processor gross margin

16.1

Processor selling price

40.3

Retail gross margin

21.4

Retail price

61.7

margin

H2 2010/11
ppl

margin

26.1
40%

11.2

30%

37.3
35%

18.7

33%

56.0

*full year figures may not be the exact average of reported six-monthly figures due to rounding

Wholesale prices also fell during the year, from an average of 40.3ppl over the first half down to 37.3ppl in the second
half of the year (Oct-10 to Mar-11). This translates to a 7% reduction in wholesale selling prices, suggesting that the retailers
were able to pass most, but not all, of the costs associated with reduced shelf prices to the wholesalers through the retendering process.
Processor margins were most heavily impacted during the second half of the milk year as the continued pressure from strong
commodity markets put upward pressure on prices paid for milk supplies. The farmgate price rose 8% (1.9ppl) to 26.1ppl
in the second half of the year from an average of 24.2ppl in the first half. The dual impact of higher farmgate prices and
reduced selling prices meant that wholesale gross margins fell from an average of 40% in the first half of the year to 30% in
the second half.

Enhanced returns available from cream sales will have contributed to the pressure from dairy farmers to increase milk
prices, and perhaps offered processors the ability to fund increased milk prices, although it may be that retailers also put
forward the high cream value as a negotiating tool to drive down wholesale prices.
It must be noted that prices paid on liquid contracts are generally at a premium to those paid on cheese or balancing
contracts in order to ensure adequate supplies. As the published Defra farmgate price is an average of prices paid for all
milk delivered to dairies, it will be less than the average price paid on liquid contracts, and higher than that paid on cheese
contracts. This means that processor gross margins based on the Defra farmgate price are slightly overstated, although they
will still represent the degree of change year-on-year.
To get a more accurate picture of processor gross margins, a basket farmgate price for liquid milk was calculated using the
average monthly price paid on liquid milk supply contracts, based on the DairyCo standard litre. It should be noted that a
substantial portion of milk purchased by liquid processors is done on retailer aligned supply contracts, which offer a
premium on the standard non-aligned milk price. The gross margins using the contract prices are presented in Table 4.

Table 4: Six-monthly comparisons of liquid milk gross margins 2010/11

H1 2010/11
ppl

Farmgate milk price*

(liquid contract prices)

25.1

Processor gross margin

15.2

Processor selling price

40.3

Retail gross margin

21.4

Retail price

61.7

margin

H2 2010/11
ppl

margin

27.1
38%

10.2

35%

18.7

27%

37.3
34%

56.0

*average of major liquid milk supply contract prices (DairyCo standard litre)

Based on these calculations, the average price paid on a liquid contract is approximately 4% (1ppl) higher than the
average Defra farmgate price, reducing the gross margin for liquid milk processors. While gross margins are perhaps more
accurate using this method, the direction and degree of change remain in line with those calculated using the Defra average
farmgate prices and, therefore, the changes in margins are consistent across both methods.

Cheddar markets
During 2010/11 Cheddar prices on UK markets edged upwards on the back of strong dairy commodity markets and
tight supplies. Within the UK, Cheddar production for the year was up 6% on the previous year as processors sought to
capitalise on the high prices available and the increased availability of milk. Although Cheddar production increased,
exports rose by 17% while total Cheddar imports declined by just under 3%, keeping available supplies for the domestic
market tight and underpinning prices.
Mild Cheddar prices showed small but steady increases throughout 2010/11, rising to 2,900/tonne, a 9% increase on
the average of 2,650/tonne in the previous year. The UK price for mature Cheddar was more stable, with only two
increases during the year, bringing average prices up 8% from 2,950/tonne to 3,200/tonne. Figure 4 shows the
movement in world and UK Cheddar prices since 2005.

Figure 4: UK and World Cheddar prices

3,500
3,000

per tonne

2,500
2,000
1,500
1,000
500

Ap

r0
Ju 5
l-0
O 5
ct
Jan 05
-0
Ap 6
r0
Ju 6
l-0
O 6
ct
Jan 06
-0
Ap 7
r0
Ju 7
l-0
O 7
ct
Jan 07
-0
Ap 8
r0
Ju 8
l-0
O 8
ct
Jan 08
-0
Ap 9
r0
Ju 9
l-0
O 9
ct
Jan 09
-1
Ap 0
r1
Ju 0
l-1
O 0
ct
Jan 10
-1
Ap 1
r11

World Cheddar cheese

Source DairyCo, DIN

10

UK mild Cheddar

UK mature Cheddar

Mild Cheddar margins

The average retail price of mild Cheddar in pence per litre terms remained stable in 2010/11, increasing only 0.3ppl
(0.5%) compared to the previous years price of 55.4ppl. Wholesale prices however increased over the year by 2.6ppl
(10%), returning them to 2008/09 levels. Farmgate prices also rose over the period, up 5% to 25.1ppl, compared to the
average of 23.8ppl in 2009/10.

Figure 5: Prices and gross margins for mild Cheddar

60

pence per litre

50
40
30
20
10
0
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Farmgate milk price

Mild Cheddar processor gross margin*

Mild Cheddar retailer gross margin*

Source DairyCo
*The gross margin equals the difference between the selling price and buying price for milk

11

Table 5: Comparisons of mild Cheddar gross margins

2000/01
ppl
Farmgate price (Defra)

2009/10

margin

ppl

17.4

Processor gross margin

5.1

Processor selling price

22.5

Retail gross margin

11.0

Retail price

33.5

2010/11

margin

ppl

23.8
23%

3.2

12%

4.5

27.0
33%

28.4

margin

25.1
15%

29.6
51%

26.1

55.4

47%

55.7

The impact of the price changes on gross margins for mild Cheddar are summarised in Table 5. The processor gross margin
on mild Cheddar increased between 2009/10 and 2010/11, rising by 1.3ppl to 4.5ppl as the 10% increase in selling price
compensated for the 5% rise in farmgate prices. In percentage terms, the processors gross margins increased from 12% to
15%. It appears that processors were able to pass on some of the increased cost of raw milk supplies to retailers in the form
of higher selling prices as the retail gross margin fell by 2.3ppl (8%) over the period. With retail prices virtually unchanged,
it was this segment of the supply chain that absorbed the impact of the sustained strength in dairy commodity markets.
As with liquid milk, farmgate prices specific to milk for cheese production were estimated using the average monthly price
paid on cheese supply contracts based on the DairyCo standard litre. This was done to compensate for the effect that higher
liquid milk prices have on the average Defra farmgate price, and the consequent understating of processor gross margins
for cheese (mild and mature).
Table 6 below summarises mild Cheddar gross margins for the past two years using the cheese farmgate price9. The
average price paid for milk on cheese contracts is around 1ppl lower than the Defra average, boosting estimated processor
gross margins. As was the case with liquid milk, the gross margins calculated using this method reflect a more accurate level
although the direction and degree of change remain in line with those calculated using the Defra average farmgate prices.

Table 6: Comparisons of mild Cheddar gross margins

Farmgate milk price

(cheese contract prices)

2009/10
ppl

2010/11

margin

22.8

Processor gross margin

4.2

Processor selling price

27.0

Retail gross margin

28.4

Retail price

55.4

ppl

margin

24.0
16%

5.6

19%

29.6
51%

26.1

47%

55.7

Retailers are generally able to source comparable products from both mild Cheddar manufacturers within the UK and other
countries, such as Ireland and therefore keep wholesale prices competitive. However, during 2010/11 it appears that
processors were able to realise higher selling prices, as the cost of imported products increased due to strong commodity
markets and limited availability resulting from favourable trade conditions. The relatively weak Sterling helped to make
exports more attractive for domestic producers and reduced available supplies on the domestic market. Another factor
reducing available supplies was the decline in Cheddar imports, which fell by 2%, primarily as a result of a 35% decline
in imports from Oceania, where milk will have been diverted to more lucrative alternative product.

9Standard litre data is not available by contract type until 2005, so there is no comparable data for the 2000/01 milk year.

12

Mature Cheddar margins

Prices for mature Cheddar at the retail level fell marginally in 2010/11, dropping 2% (1ppl) from the previous year to the
equivalent of 63.9ppl. The continuation of price promotions in the mature Cheddar market in the past year, particularly on
branded mature Cheddar, will have contributed to this. With consumers shifting demand from mild and medium Cheddar
towards mature Cheddar, it appears that promotions are being used by producers to increase (or maintain) their share of
this growing market.
Wholesale prices increased during the year, with the average selling price for mature Cheddar rising by the equivalent
of 1.0ppl (3%), although this does not take into account the cost of promotions which are generally paid for by processors
rather than retailers. While this will have the effect of reducing the wholesale gross margin, improved returns from whey
will have helped cheese manufacturers to absorb any promotional costs, as well as the increased cost of milk, which rose
by 1.3ppl to 25.1ppl, 5% up on the previous years value of 23.8ppl.

Figure 6: Prices and gross margins for mature Cheddar

80
70

pence per litre

60
50
40
30
20
10
0
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Farmgate milk price

Mature Cheddar processor gross margin*

Mature Cheddar retailer gross margin*

Source DairyCo
*The gross margin equals the difference between the selling price and buying price for milk

13

Gross margins for mature Cheddar are summarised in Table 7. With the relatively larger increase in the average farmgate
prices compared to wholesale selling price between 2009/10 and 2010/11, processor gross margins fell slightly from
24% to 22%, representing a drop of 0.3ppl.
The retail gross margin fell by 2.0ppl (6%) over the period as both a decline in average retail prices and an increase in
average wholesale prices occurred during the 2010/11 year. While the retail gross margin dropped from 52% to 49%
over the period, it remains in line with the five-year average of 50%.

Table 7: Comparisons of mature Cheddar gross margins

2000/01
ppl
Farmgate price (Defra)

17.4

Processor gross margin

8.5

Processor selling price

25.9

Retail gross margin

24.3

Retail price

50.2

2009/10

margin

ppl

2010/11

margin

ppl

23.8
33%

7.6

25.1
24%

7.3

31.4
48%

33.5

margin
22%

32.4
52%

31.5

64.9

49%

63.9

Table 8 below summarises gross margins for mature Cheddar for the past two years using the average cheese farmgate
price10. The lower average price paid for milk on cheese contracts has the effect of increasing estimated processor gross
margins to 26%, compared to the 22% value obtained using Defra prices. As with the liquid milk and mild Cheddar gross
margins, the use of standard litre contract prices allows for a more accurate gross margin figure, but does not change the
nature or degree of changes to margins, which gives confidence in the methodology used.

Table 8: Comparisons of mature Cheddar gross margins

2009/10
ppl

Farmgate milk price

(cheese contract price)

22.8

Processor gross margin

8.6

Processor selling price

31.4

Retail gross margin

33.5

Retail price

64.9

2010/11

margin

ppl

margin

24.0
27%

8.4

26%

32.4
52%

31.5

49%

63.9

During 2010/11, despite continued discounting, a decline in prices at retail level and increased farmgate milk prices on
cheese contracts, processors were able to maintain their gross margin at around 26%. The presence of strong branding in
the mature Cheddar market, along with firm commodity markets and limited supplies have helped to insulate cheese
processors from any downward pressure on selling prices. The increased selling price, supported by healthy returns from
whey, has meant that processors have been able to afford to pay the higher milk prices and to report improved profits from
cheese, as evidenced by the improved operating profits reported by Dairy Crest and Milk Link11, two of the largest Cheddar
producers in GB.

10Standard litre data is not available by contract type until 2005, so there is no comparable data for the 2000/01 milk year.
11Dairy Crest reported cheese segment profits of 28.0m for 2010/11, a 66% improvement on the previous year. Milk Link reported operating profits of
25.0m, up 27% from the previous year.

14

What happened in 2010/11

Following on from a year of highly volatile prices, the predominant feature of the 2010/11 milk year was the strength of
the world dairy commodities markets. Prices for the main dairy commodities remained high, and in some cases reached
new record highs. Butter prices remained above 2007 levels throughout the year, peaking in March 2011 at $4,700 per
tonne. While prices for powders and Cheddar stayed strong through the year, they did not quite match the highs reached
in the price surge of 2007.
After the recovery in world prices, which began in the second half of the 2009/10 year, prices for dairy commodities
on world markets maintained their upward movement on the limited growth in dairy production from the main producing
nations, while strong demand from Russia, India and China underpinned high market prices.

Figure 7 World commodity prices

6,000

US$ per tonne

5,000
4,000
3,000
2,000
1,000

-0
7
Jan
-0
8
Ap
r08
Ju
l-0
8
O
ct
-0
8
Jan
-0
9
Ap
r09
Ju
l-0
9
O
ct
-0
9
Jan
-1
0
Ap
r10
Ju
l-1
0
O
ct
-1
0
Jan
-1
1
Ap
r11

ct
O

l-0

Ju

Ap

r-

07

Butter

SMP

WMP

Cheddar cheese

Source DairyCo

UK markets did not show the same degree of volatility or price increases experienced on world markets in 2010/11,
although butter and SMP did experience substantial price increases. SMP prices in the EU and UK rose steadily through the
year despite the release of intervention stocks. Increased milk production throughout Europe, along with high world prices
for dairy commodities and a favourable exchange rate, led to increased exports. This created some supply shortages within
the EU, supporting strong powder prices.
Increases in butter prices were primarily driven by reduced availability. Strong prices for other dairy commodities, especially
cream, diverted production away from butter, which along with enhanced exports, created supply shortages. The absence
of intervention stocks, or large quantities from the private storage aid scheme, added to the pressure on supplies and further
supported rising butter prices.
With UK wholesale Cheddar prices remaining above world prices, there was little change in wholesale prices during the
year, although these did record some upward movement. SMP prices recovered during the year, although with intervention
stocks overhanging the market, the rate of increase has not matched that which occurred on world markets.

15

Figure 8 UK wholesale prices

4,000
3,500
3,000
per tonne

2,500
2,000
1,500
1,000
500

Ap
r0
Ju 7
n0
Au 7
g0
O 7
ct
-0
D 7
ec
-0
Fe 7
b0
Ap 8
r0
Ju 8
n0
Au 8
g0
O 8
ct
-0
D 8
ec
-0
Fe 8
b0
Ap 9
r0
Ju 9
n0
Au 9
g0
O 9
ct
-0
D 9
ec
-0
Fe 9
b1
Ap 0
r1
Ju 0
n1
Au 0
g1
O 0
ct
-1
D 0
ec
-1
Fe 0
b1
Ap 1
r11

Butter

SMP

Mild Cheddar

Mature Cheddar

Source DIN Consultancy

As a result of increasing dairy commodity prices, market indicators such as AMPE (Actual Milk Price Equivalent) rose
during 2010/11.

What is AMPE?
AMPE or Actual Milk Price Equivalent gives a market value (in pence per litre) for
raw milk which is manufactured into butter and SMP. It is a factory gate price and
therefore, in order to compare it with a farmgate price, an assumed amount for
delivery to the dairy must be deducted. The AMPE figure published by DairyCo is
based on the wholesale prices published monthly on DairyCo Datums website.

Figure 9 shows the historical relationship between an adjusted AMPE figure (adjusted for delivery costs) and average
farmgate price. Until 2007, the farmgate price has tracked AMPE, although with time lags between when wholesale
prices rose and when these increases were reflected in farmgate prices.

16

Figure 9 Farmgate milk price vs. adjusted AMPE

40
30
20
10
0
10

Ap
r-

05
Ju
l-0
5
O
ct
-0
5
Jan
-0
6
Ap
r06
Ju
l-0
6
O
ct
-0
6
Jan
-0
7
Ap
r07
Ju
l-0
7
O
ct
-0
7
Jan
-0
8
Ap
r08
Ju
l-0
8
O
ct
-0
8
Jan
-0
9
Ap
r09
Ju
l-0
9
O
ct
-0
9
Jan
-1
0
Ap
r10
Ju
l-1
0
O
ct
-1
0
Jan
-1
1

20

Difference

Adjusted APME

Farmgate milk price

Source DairyCo, Defra

The structure of the UK dairy market means that AMPE should, on average, represent the bottom of the market. With over
half of the milk produced in the country directed towards satisfying the liquid market and a further quarter directed towards
cheese production, processors usually need to offer a premium over commodity market returns in order to secure supplies.
This means that over time the average farmgate price would be expected to be higher than the average value of AMPE.
During periods of imbalances in supply and demand on the world commodity markets, it may be the case that AMPE rises
above the farmgate price although, following a period of adjustment when milk processors compete for milk supplies, the
liquid and cheese premiums should be re-established. With the increasing use of dedicated supply contracts, it may be that
the adjustment time will increase slightly as processors will need more time to renegotiate their contracts and pass on price
changes to the farmgate.
It can be seen in Figure 9 that prior to 2007, the farmgate price was, on average, above AMPE and displayed a seasonal
pattern of highs and lows. The sharp increase in AMPE in early 2007, combined with concerns over declining milk production
in the UK created pressure on processors and retailers to increase the milk price, and the farmgate price moved up in response.
Since 2007, the world commodity market has been more volatile. The farmgate price has continued to exhibit the same
seasonal pattern as previously, although at the higher level while AMPE has shown large fluctuations in values, following the
significant swings in world dairy commodity prices which have occurred over the past three years. The main reason why
AMPE is considerably more volatile is that, unlike in the period prior to 2007, it has been well above the EU intervention
price (IMPE), and is therefore more subject to price movements on world markets. Farmgate prices, on the other hand, have
become less influenced by variations in commodity markets, partly due to the introduction of dedicated supply chains for
liquid milk.
During the 2010/11 milk year, AMPE rose rapidly, in line with movements on commodity prices, and remained above the
farmgate price for the year. The gap between the farmgate price and AMPE only narrowed in the autumn months when
seasonal premiums are generally paid in the UK and due to world commodity prices declining on the back of rising supplies
in Oceania. Despite non-seasonal increases in farmgate prices in the early months of 2011, the gap increased again to
reach 3.8ppl in the spring.

17

Conclusion
A prominent feature of the 2010/11 milk year for the dairy industry was the sustained high level of wholesale prices
for dairy commodities on world and UK markets. While prices exhibited some volatility during the year, resulting from
the increasingly integrated world markets for dairy products, this was less dramatic than in the previous years, and most
product prices remained at high levels. Underpinning the market was strong demand from China, Russia and India which
was not fulfilled by production growth in the main exporting nations.
With world commodity markets strong throughout the year, the expectation was that farmgate prices would rise in response.
The factors which may have hampered this response varied according to the sector of the market. In general, margins in the
liquid milk supply chain remained relatively stable at retail level, with processors suffering the largest decline in margins and
farmers receiving a higher milk price. For the Cheddar supply chain, a different pattern emerges, with farmers seeing higher
returns, and wholesalers improving their gross margins at the expense of retail gross margins.
In the liquid milk market, market conditions changed substantially between the first and second half of the year as the large
multiples entered into intense price competition with the discount sector in order to recapture lost market share. While average
retail prices fell in the first part of the year as retailers aimed to deal with value conscious consumers, the realisation that
discounters were gaining market share led to more extreme discounts in the second half of the year, impacting their
margins. The competition among liquid milk processors during the retendering of major supply contracts allowed retailers to
regain part of the lost margin from reduced wholesale prices. Adding to the pressures on processor margins, prices for milk
also increased in the second half of the year as cheese manufacturers began to pass on improved returns in the form of milk
price increases. The degree to which margins have been put under pressure is evident in the profit warning issued by Robert
Wiseman Dairies late in 2010, followed by the 30% reduction in operating profits reported in its annual accounts.
In the Cheddar markets, retail prices remained stable between 2009/10 and 2010/11, although retailer margins were
reduced as processors selling prices increased. Limited supplies of Cheddar on the domestic market resulting from the
combination of reduced imports and increased exports, driven by favourable exchange rates, meant that retailers had
limited scope for negotiating lower prices. The strength of the market for dairy commodities kept upward pressure on
wholesale prices, improving returns for cheese manufacturers and allowing them to increase the price of raw milk at the
farmgate. Supported by improved returns from whey and improved gross margins, cheese manufacturers were able to
absorb this increase in the cost of milk, as evidenced by the improved operating profits reported by both Dairy Crest and
Milk Link, two of the largest Cheddar manufacturers.
With the expectation that input costs will continue to rise in the short to medium term for dairy farmers, the fact that farmgate
prices have not responded to the same degree as commodity markets has caused great concern in the industry. It has made
gaining an understanding of the process of price adjustment along the supply chain a priority. Examining whether short term
differences between AMPE, which measures returns from commodity markets, and the farmgate price balance out over time
is key to this understanding. If this were not the case, farmers might lose out in the long term.
This question will in part be examined in research undertaken by Portsmouth University for DairyCo. The research has
looked into the rate at which prices along the dairy supply chain adjust to change and how this may affect farm revenues.
Findings from this report are due to be published at the end of July 2011.

18

Appendix 1
Data Sources
Following is a list of the data used in this report, the source of data and its characteristics.
Farmgate milk prices
Farmgate milk prices are provided by Defra on a monthly basis and represent average prices received by producers, net
of delivery charges and excluding any retrospective bonuses. The prices are obtained by Defra from a monthly survey of
registered milk purchasers in England and Wales, which records volume, value and protein content of milk purchased from
farms in England and Wales. All major milk purchasers (those purchasing over 2 million litres of milk per year) take part in
the survey and approximately 91% of milk purchased from UK farms is accounted for.
The Defra published prices are weighted according to the volume of milk purchased and averages are therefore influenced
by the larger milk purchasers.
For the supply chain analysis, annual average farmgate prices are not weighted but are simple averages of the twelve
months of data.
Liquid milk contract prices
For comparison purposes, a simple average price paid for liquid milk was calculated using the DairyCo standard litre milk
prices for a basket of liquid milk contracts. These included Dairy Crest liquid and aligned contracts, Robert Wiseman
Dairies Partnership and aligned contracts, and Arlas aligned and non-aligned contracts. The average standard litre price
for each liquid milk contract is a weighted average, using an average yearly distribution of milk deliveries.
Milk for cheese contract prices
For comparison purposes, a simple average price paid for milk for cheese was calculated using the DairyCo standard litre
milk prices for a basket of cheese contracts. These included the Dairy Crest Davidstow contract, First Milks compositional
and Highlands & Islands contract, Milk Links manufacturing contract, Joseph Heler and Wyke Farms.
Wholesale prices
UK wholesale prices are collected on a monthly basis, and for the supply chain analysis, annual averages are a simple average.
UK wholesale prices are not published, but data is collected by obtaining quotations from traders and milk processors
during the month.
For mild and mature Cheddar, prices collected are based on spot prices and relate to larger quantities of a container or
more on a delivered price basis per tonne. These figures are then converted to a ppl equivalent using milk equivalent
conversion factors.
Due to the commercial sensitivity of this information, there are no published sources of wholesale prices for liquid milk, and
they are therefore estimated. This is done by deducting the value of the excess cream obtained during the separation stage
of processing milk for consumption from the total value of the milk. The value of the excess cream is based on the annual
average of monthly quotations of the ex-dairy spot price for cream at 40% butterfat for export.

19

Once wholesale prices are estimated for the year, the data is validated through discussions with the industry to ensure that
they are within reasonable bounds. In addition, information obtained from company accounts of processors helps to
validate the figures.
Retail prices
Retail prices for liquid milk and Cheddar cheese are obtained from the Kantar Worldpanel which collects survey data from
consumers on the volume and value of purchases. For liquid milk, annual average milk prices were calculated from 4-weekly
data on total expenditure and volumes of sales in multiple retailers for pasteurised milk.
For Cheddar cheese, annual average prices for both mild and mature Cheddar were calculated using 52-week data on
expenditure and volume of retail sales. As sales volumes are recorded in kilograms, they were then converted to a ppl basis
using a 9.4litres/1kg cheese conversion factor.

While AHDB, [operating through its DairyCo division] seeks to ensure that the information contained within this document is accurate at
the time of printing no warranty is given in respect thereof and, to the maximum extent permitted by law the Agriculture and Horticulture
Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered
directly or indirectly in relation to information and opinions contained in or omitted from this document.
Copyright, Agriculture and Horticulture Development Board 2011. All rights reserved. No part of this publication may be reproduced in
any material form (including by photocopy or storage in any medium by electronic means) or any copy or adaptation stored, published or
distributed (by physical, electronic or other means) without the prior permission in writing of the Agriculture and Horticulture Development
Board, other than by reproduction in an unmodified form for the sole purpose of use as an information resource when the Agriculture and
Horticulture Development Board [OR DairyCo] is clearly acknowledged as the source, or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988. All rights reserved.

20

Agriculture and Horticulture Development Board

Stoneleigh Park
Kenilworth
Warwickshire
CV8 2TL
T: +44 24 7669 2051
E: publications@dairyco.org.uk
W: www.ahdb.org.uk
DairyCo is a division of the Agriculture and Horticulture Development Board

22

Agriculture and Horticulture Development Board

Stoneleigh Park
Agriculture and Horticulture Development Board